Division of Labor and Market Size

I remember when I first read Smith's account of the size of markets and how it relates to the cost of transportation. Zzzzzzzz

Yet, every time I revisit that section, it becomes more interesting. For instance, Jared Diamond in his book "Guns, Germs, and Steel" attributes a great importance to the size of a population. If you look at it, though, he never really defines what a relevant population is, except to say that populations are historically defined by serious natural borders like mountains, deserts, and oceans. That is, the boundaries of a population are where transportation costs become too high. Diamond's account of population fundamentally depends upon the Smithian analysis of the size of the market.

I have also recently wondered why businesses do not attain some size, or market share, that is in reasonable equilibrium and stop there. Why always talk of growth? Then it hit me. The greater the extent of the market - the greater the extent of the division of labor. Smith's argument applies to individual businesses as well. A small hospital serving a small town will have a few generalist physicians. A large hospital serving a large population will have those plus many specialists the small town/market could not support. Grow the market and you can increase the division of labor within the firm to, hopefully, yield even greater returns.

Just a thought.

BK

Smith and Markets

In the first three chapters Smith talks about the division of labor, why we trade and the extent of markets. This entire discussion assumes we know what a market is and that one is in place. Smith does not tell us, though, what a market is. This is why we have read Hobbes, Locke, and Hume.

From these readings we can plausibly construe a market as a place where:

1) There are enforced property rights. This enforcement comes from both other individuals and the state.

2) Enforced contracts. This enforcement comes from both other individuals and the state.

3) Trading, where what is traded is not simply a good or service, but the rights to these goods and services. These rights are protected in 1 and 2 above.

4) Some claim to the protection of life and limb. We find this mainly in Locke and Hobbes. It would do us little good to have a market where people could not steal from us, but could kill us then take the "ownerless" goods.

At the very minimum, then, a business must work within the framework of 1-4. This does not tell us everything a business is, but it does establish a fundamental framework. Anything that violates any one or more of 1-4 above is not business.

BK

No Bailouts is Capitalism ... or is it?

What do you think? Are government bailouts part of doing business?

Smith, Malthus, Marx

Smith, Malthus, and Marx.

While these three individuals come to some very different conclusions, it is worth noticing the similarities in their arguments. The common thread that can fray shows us how close these arguments really are and perhaps why debate around them becomes so heated.

The first chapter of your reading on Smith concerns the division of labor and the “opulence” that results from the division of labor. The second chapter concerns the principle behind the division of labor. The third on the relationship between the division of labor and size of the market. Chapter IV is about money which sets the stage for Chapter 5 where Smith argues that real value resides in labor.

Malthus agrees with the notion that value resides in labor, but vehemently disagrees with Smith on the notion that the division of labor makes everyone better off. In fact, Malthus does not believe it ever could make everyone better off. Remember Smith argues in Chapter 1 section 4 that agriculture does not benefit as much from the division of labor as manufacturing. Malthus completes the argument. If manufacturing is more productive it will initially provide returns that support an ever increasing population. It will do, and must do, this more quickly than agriculture can keep up. That is, manufacturing will continue to give more workers the opportunity to procreate. Given their natural desire to procreate, or perform actions that result in procreation, the number of workers will eventually outstrip the ability of agriculture to feed them. When this happens either famine, disease, or both will wipe out a number of workers. This kills so many that the surviving workers are now easily supported by existing agriculture leading to the exact same cycle again.

Malthus agrees with Smith on the productivity of land, the short term results of the division of labor, and the ultimate value of any commodity.

Marx, likewise, utilizes Smith’s labor theory of value. The first page of our reading on the manifesto exactly acknowledges Smith’s point about the division of labor and markets. In these opening pages Marx is arguing that because of the explosive growth in markets, especially with the discovery of America, there was a corresponding explosion in the division of labor. Unlike Smith who see this as a good thing, though, Marx sees it as perhaps better than feudalism, but worse than what the proletariat deserve.

BK

Writing and Citation Reference

For those seeking a solid reference for help in writing and citations check out

The OWL at Purdue

This link is for non-Purdue folks, so you should be able to access all the links.

BK

Readings Posted

I have had some requests to post the readings for this course. I am posting the readings at

Liberty Studies


At this moment, only Hobbes is posted and you will note how the rough the page is. Unfortunately, I'm cooking dinner and this is the best I can do right now.

Updates forthcoming.

Also, students, please make sure you have read all posts below.

BK

Current Events

One of the humble reasons we do this is so that we "get it". A surprising amount of good reporting incorporates the past on many levels. These articles from the Economist this week are good examples.

The article "Schumpeter" is a good overview of many of the objectives of this course

Schumpeter: Taking flight | The Economist

Read Malthus then read

Norman Borlaug | The Economist


BK

Malthus and Smith

I have posted week 5 readings on Adam Smith and Thomas Malthus.

The reason I have chosen these two is that, presently, the world seems to be either Smithian or Malthusian in their outlook on business.

The Smithians (If I may) roughly believe that the division of labor and trade make us all better off.

The Malthusians roughly believe that competitive forces in the market actually makes us all worse off.

I believe this division is much deeper, and more accurate, than talking about Socialists and Capitalists. Examining these earlier documents gives us a good deal of insight into modern discussions of sustainability.

Hume and Convention

How is justice a Hawk-Dove Game? (For my students I also posted this under Week 3 in Blackboard).

Hume makes this possibility clear with the following example (not included in our readings):

"Two Grecian colonies, leaving their native country, in search of new seats, were inform'd that a city near them was deserted by its inhabitants. To know the truth of this report, they dispatch'd at once two messengers, one from each colony; who finding on their approach, that their information was true, begun a race together with an intention to take possession of the city, each of them for his countrymen. One of these messengers, finding that he was not an equal match for the other, launch'd his spear at the gates of the city, and was so fortunate as to fix it there before the arrival of his companion. This produc'd a dispute betwixt the two colonies . . ."

The choice facing each colony is whether to fight over the city or not. The case of the two Grecian colonies is not a coordination game, since there is a considerable conflict of interest present. Neither is it a prisoners, dilemma, since there is no dominant strategy for either player. These types of conflicts over goods can be modeled as a Hawk-Dove game

The Hawk-Dove game consists of two strategies: the aggressive “hawk” strategy and the passive “dove” strategy. A hawk is willing to fight over the disputed good. A dove initially stakes a claim to half of the good. If, however, her opponent shows any signs of aggression, then the dove relinquishes all claims to the good. Therefore, if two doves meet, the good is equally divided between them. If a dove meets a hawk, the hawk acquires all of the good and the dove receives nothing. If two hawks meet they fight over the good. The parties to the conflict are assumed to be equal in the sense that both members have power to inflict equal expected harm on their rival. Furthermore, in the face of an equal foe both parties should expect an equal chance of victory. This gives us the following game.

Player 2

Dove Hawk

Player 1

Dove 1,1 0,2

Hawk 2,0 -2,-2

Hawk-Dove Game.

The players analyze the game in the following manner. Player one knows that if Player two plays hawk, player one does better to play dove and receive a payoff of 0 instead of -2. On the other hand if player two is going to play dove, player one does better to play hawk for a payoff of 2. The same reasoning applies to player two as well.

Agents wishing to form a convention for the stability of possession will face a hawk-dove game in at least two situations: original appropriation and those instances where, even if homogeneous, an agent could gain by taking another's possessions. The hawk-dove game represents the very real element of force present, or implied, in forming a convention for the stability of possession. The best thing to do still depends on what one's opponent(s) will do.

This is why convention and possession are so important for Hume ( see p. 259 of our readings). Possession lets us know who will play hawk and who will play dove. If I know possessors will play hawk, then with respect to the possessions of others I will play dove, and vice versa. We each know and recognize this we leave each other alone to enjoy our possessions. It is through repeated respect for possession then that rules of property begin to arise.

Hobbes is right that it is war, but he’s wrong to say that it is still war even after a period of silence. Locke is right to say that there are rights to property, but he fails to tell us how it is that agents come to respect these rights when there is no government. Hume completes the story for both. When we recognize the game we are playing, we understand that some form of order is better than none. Possession is the signal we use to establish that order.

Possession may not be 9/10s of the law, but it is 9/10ths of the origin of property. See page 275 of the readings. Mix your labor with somebody else’s field and see what happens.

Basically from 259-275 Hume is talking about how selfish individuals in a scarce world solve the problem of fighting. Think of it as an intricate dance where each has a role to play, possessor or non-possessor, and it is this dance between the two he calls convention.

Hume and The Problem of Cooperation

We are born weak and needy.

We can’t do much by ourselves.

Notice on p. 254 the benefits of working together: 1) more power, 2) increased ability through “partition of employments” 3) mutual protection We gain all three in society.

Society is advantageous – but how do we learn this? Sexual desire draws people together and spawns families. It is within families that we first learn of the benefits of cooperation.

Why worry about this?

Consider the problem – we know society is advantageous, but we are selfish and this is an impediment to the formation of society. The standard answer to this is that we need to be more generous and kind. Hume, though, rightly points out that this makes matters worse since kindness is connected more powerfully to those close to us. Think of a mother bear and her cubs. Come between her and her children and she will kill you, even if you just accidentally strayed. This is a new reason for fighting on top of Hobbesian selfishness – helping those we love. Generosity, then, allows us to have our family or clan as a small society but it will go no further. Instead of individuals in a state of war we now have families in that state.

What makes it even worse is that the easily transferrable goods we all want, like food, are scarce. In order to get the things I want it looks like my family will have to fight yours.

Remember, though, that society is better than war and we know this. How then do we make society larger?

The relevance to business is direct. People immediately realize the problems self interest creates. However, their responses are as tired as they are mistaken. There is no general love of mankind. We are not Gods. Telling us to be more kind results in us being more kind – to those closest to us. Is it any wonder that the stories of the “greedy” CEO is accompanied by the story of how those closest to him enabled the unethical behavior. They were kind to each other while they fleeced everyone else. How then to overcome this problem? We need to since business depends upon the widespread cooperation known as “The Market”.

BK

Locke and the Environment of Business

Locke identifies the power of punishment in Chapter II, sections 7 – 11. Why should this be important for business? As I see it, the main reason is that Locke here is stipulating what may morally be done to those who violate the natural law by harming others in the ways listed in section 6. By violating those rights the criminal “declares himself to live by another rule (sec. 8). By doing this the criminal becomes dangerous to humankind and therefore anyone in the state of nature may punish him. In sec 11 we see briefly that what the magistrate does is, by agreement, exercise that authority for others.

This actually begins to lay the foundation for business. There are two important aspects of this foundation. First, that a person has property rights means that she can legitimately defend her property, even with the help of others, against those who would take it. This is an important authority to have since without it there is no justified self-defense in business transactions. This is why it is one of the obligations of a government to protect your property: For various reasons they are exercising this right for you. This is the argument people focus on when they say things like “I have a right that ought to be protected.”

There is, however, a second moral consideration often overlooked in such debates. It is only by violating these rights that others may punish me. After these rights are suitably clarified, I may do anything I see fit so long as it does not violate these rights. This is a concept of liberty and it is essential for business activity.

There are a myriad of actions that constitute business activity. Imagine having to seek permission from the ruler for each and every action one needs to do for conducting business. The more permissions required, the harder it is to conduct business. On the other hand, in a Lockean system, no permissions are necessary as long as actions do not violate the rights of others. Here it is incredibly easy to conduct business. Perhaps there are other costs, and we will come back to this point, but if I am free to act it does mean that you have no right to punish me by taking what is mine. The promise is that if I do not violate the rights of others I get to keep the produce of my efforts. It is not any disparity in wealth that these rights protect, it is only wealth gained through actions in accordance with the natural law. If this law is kept, you get to keep your profits. Violate this law and they may justifiably be confiscated.

Notice now that it is the confluence of having to ask permission and liberty that creates the milieu in which business acts. This atmosphere will determine how business is done, just as surely as supply and demand.

BK

Locke on Legitimate Power

Book II, Chapter I, Section 2: The main purpose I have included this passage is to show that Locke properly distinguishes between different types of power. He does so because each type of power has its own proper authority. To exercise the power and authority of a father when one is the ruler of a commonwealth is mistaken, dangerous, and wrong.

Likewise, we must think about the power of a business owner. If that power is not the Hobbesian power to kill one’s equals, what is it? Whatever we may wish to say about Hobbes, he at least has an answer. If we are going to say that his answer is mistaken, we need to have something to take its place or our remarks are idle criticism.

Since political power is the power to make laws with penalties of death – it is probably safe to say that business power is distinct from political power on this account. Remember, we are talking about the proper sphere of authority. A father can kill his family just as assuredly as a businessperson could take the life of a rival. This, however, does not make the father’s power one of political power. Paternal power and political power are different things, though one can abuse both. The same is true about business. The legitimate power a business owner possesses is not political power.

What then is the legitimate power of those in business?

In Chapter II, Sections 4-6, we get the beginning of an answer. For Locke, legitimate power does not depend on the existence of the state (as it does for Hobbes). Our equality means that no one is born with legitimate political power over another. The state of nature is “a state of perfect freedom to order their actions and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature; without asking leave, or depending upon the will of any other man.”

This state of perfect freedom focuses on what you may do with your own person and belongings. Unlike Hobbes, Lockean agents are bound by the Laws of Nature: “being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions” (Cap II, Section 6).

Therefore, the limits of the legitimate power of anyone, including the business person, are defined by these rights that precede the commonwealth and its ruler.

BK

Attila The Hun and Business

You want to get rich - write a management book. You want to waste money - buy a management book.

OK, maybe that is unfair, but there are a surprising number of books being sold that draw on Hobbesian imagery. For instance check out: Leadership Secrets of Attila the Hun.

One of the reasons I became so interested in this class is that it seems that sloppy thought about what business is, allows for sloppy writing posing as business advice. Being better aware of what business is should help you, at the very least, choose better what to read.

If you do ever buy this book, or one like it, buy it only because everyone else is. NOT because it is going to give you some secret gleaned from mass murderers and their supposed business savy.

BK

Trump

I've added Donald Trump's Blog link to the right. I know - Trump is always trying to sell himself. But he's good at it. Furthermore, he uses the language of being tough without crossing into nonnsense about war. That could change tomorrow - but his books are about adding value, and of course, how he can help you add that value :)

We'll talk more about him in the future.

BK

Hobbes and Business

Chapter XV talks about enforcing contracts. It is here that I think Hobbes makes an argument that does currently, and historically, divide those who think about such issues.

At the time of signing, contracts are invalid if there is fear of nonperformance by either party. In “Hobbes and Contracts” I pointed out property is a necessary part of contracts. In XV Hobbes points out that property also rests on contract, that contract is necessary for property. That a piece of property is mine means both that I have a right to it AND that you give up, renounce, your right to it. The form of the contract is: I give up the right to take that; you give up the right to take this.

HOWEVER, in a state of nature there is no assurance you, or I, will abide by the agreement. In fact, according to Hobbes, we have plenty of incentives not to keep our agreement. This means we must each fear nonperformance of the other party. We know this when we “sign”, from the beginning, and therefore there is no such contract and no such thing as property.

According to this argument, then, property and contract only exist where there is a state. “... the validity of covenants begins not but with the constitution of a civil power, sufficient to compel men to keep them: and then it is also that propriety begins.” (By “propriety” Hobbes means property.)

This is important for our purposes because business does not exist without property and contract. If Hobbes is right, it means that business cannot exist without the state. Business owes its very existence to the commonwealth. I believe this has significant moral and policy implications about the relationship between business and government. We shall return to this point .... in time.

BK

PS. Make sure to read the post(s) below as well.

Hobbes and Contracts

Much of Chapter XIV is dedicated to discussing what contracts are, how they come to be, and when they are valid or void. Chapter XV talks about enforcing contracts.

Even though he is talking about the state Hobbes is also discussing two fundamental concepts of business: contract and property.

I) Contract is how we trade rights as well as tangible goods and services. Remember in the state of nature we have a right to all things – including each other. Contract is how we stipulate what rights we are giving up. In simplest form, a contract for us to trade $1 for a can of soda is an agreement that I will relinquish my right to the $1 in exchange for you relinquishing your right to the soda. It is also notification that once we sign I will now claim the soda as my property and you will do the same with the money. This is the difference between trading and stealing. In stealing you get the good, but never the corresponding right to the good.

II) Notice, in this account, that property is a necessary part of contract. If something is not mine, I cannot trade the right to it. Contract depends on property.

On both I and II Hobbes is in agreement with modern theorists and practices. In fact, I know of no real debate concerning these two points.

Bill